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Econ 881 / MPA 844 A BAKER’S DOZEN SIGNPOSTS IN CANADA’S POST-WAR POLICY EVOLUTION: REFLECTIONS OF A MARKET POPULIST by Thomas J Courchene Jarislowsky-Deutsch Professor Department of Economics and School of Policy Studies Queen’s University and Senior Scholar, IRPP 2012 (Source: Paper with same title, available from author) TC-083

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INTRODUCTION Goal: To focus on the key policy turning points (Signposts) in the Canada’s post-war socio-economic evolution. The intention was to limit the signposts to 10. But this turned out to be too few in order to cover the key developments so I ended up with thirteen and even then some signposts have more than one component. Obviously, others would have chosen differently. Would be useful in my view if this was carried over to other areas, e.g., 10 key signposts in monetary policy, in tax policy, in social policy, in public administration, and so on. Focusing on the 10 key turning points in a selected policy area in lieu of writing an exam might be an option that would appeal to some of you. TC-083

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Signpost #1: Post-War Embedded Liberalism and American Supremacy John Ruggie’s “Compromise of Embedded Liberalism” Process of internationalization and economic liberalization was cushioned by the rise of the welfare state. Indeed, the most open economies (e.g., Nordic countries) had the most pervasive social envelopes  New international Order (World Bank, IMF, GATT on economic side and UN, NATO etc. on political and security side  Move toward currency convertibility and greater capital mobility US becomes uncontested world superpower- economically, financially, militarily and “morally”  Because US exited WWII with its infrastructure intact, it became workshop to the world. Since US workers had more capital to work with, this led to rise of the US middle class, even for lesser educated workers. All gone now (see Signpost #9B) TC-083

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Signpost #1: Post-War Embedded Liberalism and American Supremacy; continued This hugely benefits Canada Exports to US mushroomed, helped by Autopact, FTA, etc Allowed us to punch above our weight, and advance areas of mutual interest Got into G7, and developed middle power role But most importantly it did not prevent us from marching to our own social policy drummer. (Signpost #3) And we did not follow US into Vietnam or Iraq All in all, post-war embedded liberalism served to provide substance to Sir Wilfrid Laurier’s assertion that the 20 th century would belong to Canada TC-083

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SIGNPOST #2: Quebec’s Personal Income Tax (QPIT) Arguably, is the key factor that led to our decentralized federation Ottawa attempted to transfer money directly to Universities (early 50s) Quebec said no – set up Tremblay Commission. Led to creation of QPIT (with a tax collection system) in with 15% tax rate. Ottawa afraid other provinces would follow suit. Hence provided an abatement to the provinces of federal tax revenues on a derivation basis, i.e., on what was raised in the province. Abatement =10% of federal PIT revenues, 9% of CIT and 50% of succession duties But this meant that some provinces got more per capita than others. Therefore, Ottawa establishes our equalization program in 1957, equalizes these three revenue sources to the average of the top two provinces, only Ontario is not a recipient. Prior to this era, if provinces want a new program, need to transfer the power to Ottawa – amendments give Ottawa OAS & EI. But after 1957, Ottawa used tax point transfers to allow provinces to develop welfare, PSE and Health programs. Without equalization, the poorer provinces would never have allowed the existing degree of tax decentralization TC-083

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Signpost #3: JFK’s New Frontier, LBJ’s Great Society, Pearson’s Social Transformation, cont. Kent’s comment on an earlier version of this paper was that the political key to the Pearson era was the election of the Jean Lesage’s federalist Liberal Gov’t in Quebec and the launch of la révolution tranquille. Lesage was a minister in the Louis St. Laurent Liberal federal government prior to becoming head of the Quebec Liberal Party in Allowed him to work with Ottawa Kent retired to Kingston and became an Adjunct Professor in the School of Policy Studies He remained a very active and influential commentator on Canadian public policy until to his death in November of TC-083

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SIGNPOST #4: The Parti Québécois, The Bloc Québécois and Quebec Separatism Charles de Gaulle and “vive le Québec libre” (1957) René Lévesque takes power Enacts Bill 101 (French as official language and the language of work); 1980 referendum; Lévesque refuses to be part of Charter and Patriation in 1982; Meech Lake Accord 1987, fails in 1990; Bouchard leaves Mulroney cabinet to form Bloc Québécois (1990); Launch of the Bélanger- Campeau Commission on the future of Quebec (personal note; When I appeared as a witness before the B-C Committee, I stated: For Quebecers, Quebec will always be their nation and Canada will always be their state, whereas for the rest of us Canada is viewed as the locus of both nation and state.) 1996 Calgary Declaration endorses Quebec specificity; Annual Premiers conference (2004) suggests passing Pharmacare up to Ottawa, except for Quebec which would keep its own program. In the year fiscal arrangements agreement, Ottawa allowed Quebec more control over Health cash transfers to Quebec than to ROC. TC-083

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SIGNPOST #4: The Parti Québécois, The Bloc Québécois and Quebec Separatism, continued The culmination of all of this was the 2006 House of Commons unanimous declaration that “the Québécois form a nation within a united Canada.” With the sudden collapse this year of both the PQ and the BQ it seems clear that Quebecers are no longer supporting parties whose primary rationale is to create their own state. This is a truly remarkable result, especially to those of us who worked long and hard to keep Quebec within the Canadian family My conclusion: This is in large measure due to the fact that the rest of Canada accommodated Quebec in ways that allowed Quebecers to create their own nation within the Canadian state. Arguably, Canadians have proved themselves to be masters of the art of federalism. But the challenge may not yet be over. TC-083

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SIGNPOST #5: Patriation and the Charter: Empowering Citizens and First Peoples Canadian Charter of Rights and Freedoms includes fundamental rights (democratic, equality, mobility, legal) and aboriginal rights (recognized Métis peoples and constitutionalized the existing and future treaties, e.g., Land Claims Agreements). Charter has become as defining feature of Canada – the language of rights is a Canadian language not a provincial language Constitution states (s.91(24)) the Ottawa is responsible for “Indians and Land Reserved for Indians”. But Ottawa has interpreted this as “Indians on Land reserved for Indians.” In my view, the Challenge is to ensure that the collective rights of First Nations does not undermine individual FN citizens’ ability to have the same rights as other Canadian citizens. Gordon Gibson has a new book that, from its title appears to be embracing this vision. A New Look at Canadian Indian Policy: Respect the Collective – Promote the Individual (Fraser Institute) TC-083

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SIGNPOST #6: Immigration and Multiculturalism A: Immigration We are a land of immigrants (abstracting from our First Peoples) initially from Europe and more recently from Asia and Latin America Immigration is a concurrent power with federal paramountcy. With the Cullen Couture Agreement in 1978, Quebec enacted its own immigration policy and point system. ROC left Ottawa in charge, but now have a Provincial Nominee Program in most provinces. Ontario: Should have argued for accepting foreign graduates of its universities. Australia now does this Immigrants are not doing as well as they used to. However, second generation Canadians are better educated than those whose parents were born in Canada. Future labour force growth has to come from immigration TC-083

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SIGNPOST #6: Immigration and Multiculturalism: II B: Multiculturalism 1969 Bi and Bi Report; led to 1971 multicultural policy Charter: s.27 states “this Charter shall be interpreted in a manner consistent with the preservation and enhancement of the multicultural heritage of Canadians Canada Multicultural Act We have always integrated immigrants via the labour force and rewarded them on their individual skills, unlike continental Europe – civli law vs. common law, or communitarian vs individualist capitalism As text notes, multiculturalism must be based on section 15 (1) of the Charter reads “Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, sex, age or mental or physical disability.” Last paragraph of the paper is a good summary TC-083

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SIGNPOST #7: THE TRANSFORMATION OF CANADIAN ECONOMIC SPACE: THE FTA AND NAFTA Before the beginning FTA (1989) all provinces except ON and NL exported more to the rest of Canada than to the US. By 2001 (7 years after NAFTA) all provinces except MB exported more to the US -- in aggregate terms about double, 38% to US and 20% to ROC. Hence, Canada became more and more an east-west series of north- south economies and less and less a single east-west economy. Issue became (or should have become) one of how to overlay an east-west transfer system on a progressively N-S economic system. But the newer reality is that of the hollowing out of the US (to China) and a challenge to Canada to diversify its export markets. NAFTA and Foreign Direct Investment:. Prior to the agreements, US companies utilized foreign direct investment to leapfrog the high Canadian tariff to establish Canadian subsidiaries to sell only in the Canadian market. One result was that US foreign ownership became a political issue in some Canadian quarters. This is the very opposite of the current reality where we encourage foreign investment in order service NAFTA economic space. (more on this in Signpost #12 TC-083

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SIGNPOST #8: The Informatics Era (IE): Transformative Technology and Transformative Ideology A:Transformative Technology: Internet & Social Networking There is a new general purpose technology (GPT), based on the Internet, that is in turn the basis of the Network, the ubiquitous organizational of the IE. Networks underpin both social networking (Arab Spring) and global supply chains. IE privileges human capital in the same way as the Industrial Revolution privileged physical and financial capital. As Lester Thurow noted: If capital is borrowable, raw materials are buyable and technology is copyable, what are you left with if you want to run a high-wage economy? Only skills, there isn’t anything else! B: Transformative Ideology Reagan and Thatcher moved to “recapitalize capitalism”. Reagan reduce the top federal PIT rate from 70% to 28%. A new orthodoxy was established throughout the world … unfettered capitalist globalization, spearheaded by the liberalization of financial markets. Result: capitalism recovered its dynamism and increased growth and profits. TC-083

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SIGNPOST #9: The Informatics Era and the Transformation of Global Economic Space A: Rise of China as the Global Workshop About 1.5 billion new workers entered the global labour force. Wages fell dramatically. Led to off-shoring and outsourcing. China invited global firms to produce there. Reduced import tariffs on all inputs. Huge advantage. Required foreigners to partner with a domestic firm and to share technology. China pegged its Yuan to the US dollar, which provided security to companies in terms of maintaining global competitiveness (since an appreciation of the Yuan would saddle China with huge losses and, therefore seemed unlikely). China became the largest exporter, surpassing Germany and is the second largest economy (will pass the US soon), has 3 of the 4 largest banks and 3 of the 5 largest companies. However, its per capita income in 2008 was $US 3,500 compared with $46,000 for the US. Recently, has been an agreement between China and Japan to book their trade in yen or yuan: the beginning of a rival global currency? TC-083

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B: the Decline of the American Empire “America is an empire enthralled with its own power and unaware that it is fading” (Ouroussoff, 2005) Overextended on debt and deficits; massive offshoring and the collapse of the middle class; US is the most unequal society of the industrialized world; the financial collapse led to Wall Street turmoil and the decimation of the housing market, and the recession. US is becoming more beholden to China financially while China is becoming less dependent on the US economically. US political system is paralyzing, dysfunctional and too subject to gerrymandering, and the Citizens United court case allows unlimited electoral spending, Tom Friedman’s perception of the problem: “[America let its] five basic pillars of growth erode since the end of the cold war – education, infrastructure, immigration of high-I.Q. innovators and entrepreneurs, rules to incentivize risk-taking and start-ups, and government-funded research to spur science and technology.” TC-083 SIGNPOST #9: The Informatics Era and the Transformation of Global Economic Space:II

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SIGNPOST #10: MONETARY, FISCAL AMD FINANCIAL SUSTAINABILITY: THE MAPLE LEAF MIRACLES A: The Bank of Canada and Inflation Targeting Bank moved from money supply targeting to income targeting and finally (in 1991) to Inflation targeting Target Rate is 2% within a band of 1% - 3%. If inflation moves outside this range, the Bank will take action (via short-term interest rates) to bring in inflation back in target within an month framework. Very successful, helped bring inflation and interest rates down quickly in the 1990s that in turn helped tame the deficit (see section B) Bank has significant credibility at home and abroad, has been an innovator in terms of how to go about inflation targeting Our Governors have been first rate. A feather in the Bank’s hat is the appointment of Governor Mark Carney as the head of the international Financial Stability Board Confession: The above would be the near-unanimous view of the economics and financial community. However, my view is the unrestricted exchange rate flexibility is leading to inappropriately wide swings in the exchange rate. (see Signpost #12B). TC-083

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SIGNPOST #10: MONETARY, FISCAL AMD FINANCIAL SUSTAINABILITY: THE MAPLE LEAF MIRACLES: II B: Taming the Federal Deficit: Canada as the Fiscal Virtuoso of the G7 After 17 consecutive deficits, Ottawa ran a surplus in How? Paul Martin in his 1995 budget set targets (4%, then 3%, then 2%, then 1% and then budget balance) that would be achieved come “hell or high water” Adopted a 3-year planning horizon, called on private sector for forecasts, added prudence to the estimates, created the CHST and then cut it by one-third (about $6 billion), took $5 to $6 billion annually from the surplus of EI program, cut program spending by 10%. Helped by drop in inflation and interest rates (decrease debt servicing), by depreciation of the $C, by the US hi-tech boom, Then Martin prefunded the CPP/QPP by increasing the premium rate from 5.6% to 9.9% and the CPP is now financially secure for decades. Used the resulting surpluses to reduce tax rates and to increase health and social spending. All in all, an achievement that was the envy of all of our trading partners TC-083

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SIGNPOST #10: MONETARY, FISCAL AMD FINANCIAL SUSTAINABILITY: THE MAPLE LEAF MIRACLES: III C: Avoiding Financial Collapse: A Regulatory Success Canada’s securities industry is provincially regulated (unique in world). In the mid-1980s the provinces, led by Quebec and followed quickly by Ontario, threw open the existing restrictive ownership rules. Ottawa expressed concern, since opening up the ownership of the industry was to be a bargaining chip in the ongoing FTA negotiations. Ontario agreed to limit ownership to Canadians for a year prior to allowing foreign owners. Result: Canada’s chartered banks had a field day – BNS acquired Scotia McLeod, RBC (Dominion Securities), CIBC (Wood Gundy), BMO (Nesbitt Burns), Banque Nationale (Lévesque Beaubien), with TD Bank establishing its own securities firm that eventually morphed into TDWaterhouse. i.e., the banks took over most of the sector. In the same time frame OSFI (Office of the Superintendent of Financial Institutions) was created. Although securities firms were provincially regulated, OSFI ensured that their operations did not pose financial problems for the banks. TC-083

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SIGNPOST #10: MONETARY, FISCAL AMD FINANCIAL SUSTAINABILITY: THE MAPLE LEAF MIRACLES: IIII C: Avoiding Financial Collapse: A Regulatory Success (cont.) In effect, Canada’s securities industry operated within a banking framework, unlike the hedge-fund US framework (i.e., our companies faced higher capital ratios than in the US). Indeed, Citibank abandoned its bank charter to become Citicorp in order to fall under the lightly regulated hedge-fund sector, much to its financial regret While the Canadian banks did suffer losses as a result of their activities in the asset-backed commercial paper (ABCP) market, they escaped the utter financial carnage that befell the US and many European countries. The result is that Canada arguably has the most healthy monetary, fiscal and financial sectors anywhere. Plaudits all around to Canada’s macro managers! TC-083

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SIGNPOST #11: The Rise of the West: From the Reform Party to a Conservative Majority Preston Manning launched the populist, conservative Reform Party in Obtained 52 seats in 1993 election to become the effective opposition (official opposition was the Bloc Québécois). Reform became the official opposition after 1997 election with 60 seats. Reform never won a seat east of Manitoba. Morphed into the Canadian Reform Conservative Alliance. Lost in 2000 election. Under the “unite the right” it merged with the Progressive Conservatives in 2003 to form the Conservative Party. Stephen Harper becomes leader in Holds Paul Martin to a minority in 2004 election. Harper becomes Prime Minister with a minority victory in 2006, repeated in 2008, and finally wins a majority in the 2011 election. The West is in! This is new territory for federal politics – a right-of-centre governing party with a left-of-centre official opposition with the centrist Liberals largely out of the picture. Harper embraces “open federalism”, a policy designed to respect the 1867 constitutional division of powers, which in turn means that Ottawa will be focusing its attention on those areas that fall under federal jurisdiction, and stay out of provincial jurisdiction. TC-083

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SIGNPOST #11: The Rise of the West: From the Reform Party to a Conservative Majority; II Further In this context, the Globe and Mail’s John Ibbitson (2011) has proffered an intriguing “open federalism” interpretation of recent events. On the social policy front, Ottawa’s announcement -- that the federal-provincial cash transfers beyond 2017 will be indexed to GDP growth with a 3% minimum and that the provinces will be left on their own to rework Medicare with few or no strings attached so as to live within this cash envelope -- represents an open-federalism-type, hands-off approach to areas under provincial jurisdiction. The quid quo pro, à la Ibbitson, would be for Ottawa to increase its role in terms of s.91 powers, and especially over the macro-economic and economic-union levers. The obvious candidate here, and a key federal priority, was to be the creation of a single national securities agency. The recent Supreme Court decision stopped Ottawa dead in its tracks, but it is a safe bet that we have not seen the last of this. Further problem for open federalism is that under the new IE era, many areas under provincial jurisdiction are now in the national interest – early childhood development, human capital, global city regions, etc. Open Federalism should not ignore this. TC-083

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SIGNPOST #12: Resources and the Transformation of Provincial Economic and Fiscal Geography A: The 1970s Energy Price Shocks And The National Energy Program First energy price shock, , second (Iran-Iraq war). Triggers the 1980 National Energy Program (NEP). The combination of additional taxes, of incentives to shift exploration from provincial lands to Canada lands, of two “nationalization” provisions (one to give Ottawa the right to a 25% interest in all petroleum developments on Canada lands and the other a Canadian Ownership Charge in order to increase public ownership of the energy sector) represented an unprecedented frontal attack on the energy patch that became permanently etched in the psyche of Alberta and Albertans Arguably leads to s.92A of the Constitution Act, This gives the provinces the right to legislate exclusively in relation to the exploration, development and management of, as well as the right to raise money by and mode or system of taxation on, non-renewable natural resources and forestry and the generation of electrical energy. To my knowledge no other federation has anywhere near such a powerful province-rights provision. Huge implication for GHG policies TC-083

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SIGNPOST #12: Resources and the Transformation of Provincial Economic and Fiscal Geography B: Resources, the Floating Loonie and the Dutch Disease Dutch Disease: named because the revenues from Holland’s energy exports so appreciated its currency that it clobbered manufacturing From Figure 1, from roughly $20 per barrel in 1998 the price of oil soared to over $100 early in the 2000s (and even spiked briefly to $150 per barrel in 2008). In roughly the same time frame the loonie appreciated from under 70 cents to roughly 105 cents in the middle of the first decade of the 2000s, for an appreciation of about 50%. The appreciation also led to the collapse of manufacturing as well as triggering a resource boom, one consequence of the latter is that the per capita revenues of the energy/resource intensive provinces have ended up being several thousand dollars larger, after equalization, than those of the other provinces. If this persists, the likely result will be superior public goods and/or tax havens in the resource-rich provinces. TC-083

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SIGNPOST #12: Resources and the Transformation of Provincial Economic and Fiscal Geography B: Resources, the Floating Loonie and the Dutch Disease: II With respect to the fiscal disparities, my proposal is to “revenue test” the federal-provincial cash transfers (CHT and CST) by, say, reducing a province’s cash transfers by 20 cents for each dollar that the province’s total revenues (defined as own-source revenues plus equalization) exceeded some threshold, e.g., say 115% of the all province per capita average, with the resulting federal savings put through this process again until the original CHT/CST total has been exhausted. While this use of the CHT and CST transfers as an over-arching equalization formula is not likely to find policy favour, it should be noted that these transfers have until recently been “income-tested” with a one-for-one clawback if a province’s per capita personal income tax revenues associated with the CHT/CST formula exceed the per capita equalized value of these PIT revenues. But revenue testing is far more appropriate than income testing if the goal to reduce interprovincial fiscal differentials TC-083

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SIGNPOST #12: Resources and the Transformation of Provincial Economic and Fiscal Geography B: Resources, the Floating Loonie and the Dutch Disease: III On the Dutch Disease side, the fundamental problem is that the Canadian currency area is too small to accommodate a resource superpower and a global manufacturing centre. In terms of ameliorating the operations of the Dutch Disease, the remedies run the gamut from i) increasing the size of the currency area (via fixed exchange rates, perhaps en route to a Canada-US monetary union), ii) altering inflation targeting to incorporate exchange-rate priorities, iii) following the recent Swiss approach of putting a limit on how much the Canadian dollar can appreciate vis-à- vis the US dollar, and iv) following Norway’s approach in encouraging (provincial) sovereign wealth funds that would invest the bulk of resource rents in international capital markets. While none of these alternatives is likely to find support among my fellow economists, failure to address the issue may well lead to political roadblocks on the ability of the resource provinces to pursue their resource-based development plans. TC-083

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Melting Ice: Opens up Europe-to-Asia routes; creates survival problems for northern wildlife. Burning or melting tundra may double the amount of GHGs in the atmosphere Resources: Arctic has an estimated 13 percent of the world’s oil and 30 percent of the world’s gas. Geo-Politics: Arctic is becoming a complex geo-political arena with competing national claims over land, water, seabed as well as resources of all types. Even the Chinese have one ice-breaker in the Arctic, with another on the way. And enveloping all of the above is the issue of arctic sovereignty. Environmental disasters are more likely Sovereignty and Northern Peoples: Canada’s claim to sovereignty over what we argue are “internal Arctic waters” owes a great deal to Inuit occupancy and stewardship over the centuries. They are the “use it” in the “use it or lose it” version of sovereignty. But at a more fundamental level, as Canadian citizens they merit our commitment to ensure their future well being and that of their communities. TC-083 SIGNPOST #13: Arctic Exposure: Melting Ice, Resources, Geo Politics, Sovereignty and Northern Peoples

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Economic Issues: For a recent year equalization payments amounted to $18,000 per capita for Yukon, close to $19,000 for NWT and a whopping $30,000 for Nunavut, whereas the largest per capita provincial equalization payment is well under $3,000. Are the territories mere wards of the state? NO, because if they had the same rights to resource revenues as do the provinces, then they would be able to increase their revenues to a level that for some would easily exceed their equalization payments. There is one emerging problem that has the potential for stymieing northern development, namely that there are at roughly 25 constitutionalized entities in the north (the 14 Yukon First Nations agreements, several more in the NWT, the four Inuit Land Claims Agreements and the three territories). This is a recipe for the economic balkanization of the north. Small wonder that the Mackenzie Valley Pipeline may fall by the wayside – there are way too many players holding vetoes. What is needed is some version of an internal northern economic union that would allow freer movement of goods, labour and capital across these northern jurisdictions. TC-083 SIGNPOST #13: Arctic Exposure: Melting Ice, Resources, Geo Politics, Sovereignty and Northern Peoples: II

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CONCLUSION The above signposts represent my choices for the key turning points in the evolution of Canadian public policy. Some of them are no longer in play and have become part of our policy history. Others, like the last few, are driving our current and even our future policy challenges and choices. The obviously subjective nature of this exercise means that some of the signposts would make everyone’s list while others would not. Indeed, having undertaken this exercise, one now tends to worry more about those that were left out than those that were included. Nonetheless, what stands out from all this (and would also stand out from others’ selections) is just how fascinating Canadian public policy can be and, indeed, has been. This will be true in the future as well since it is our collective fate to continue to live in interesting times. TC-083